The importance of examining contractual chains

THE principle of sub-bailment is important to the law of carriage of goods. This principle has two important implications. First, when the sub-contractor is faced with a claim from the shipper, it may rely on the terms of the contract (usually limitation clauses) between the main contractor and the shipper, by reason of a Himalaya clause in the main contractor's agreement with the shipper. Second, the shipper may find that it is bound by terms it had no actual knowledge of.

The case of The Pioneer Container ([1994] 3 WLR 1), decided by the Judicial Committee of the Privy Council, sheds light on this subject. In this case, the plaintiff was a cargo owner who shipped goods under bills of lading which gave the carrier authority to sub-contract the whole or part of the carriage of the goods 'on any terms'. The carrier then sub-bailed the goods to the defendant shipowner under feeder bills of lading, which contained an exclusive jurisdiction clause providing for Taiwan to be the forum to determine any disputes arising from the bill of lading. Upholding the decision of the Court of Appeal of Hong Kong to stay the proceedings in Hong Kong in favour of Taiwan, the Privy Council held that the exclusive jurisdiction clause in the feeder bills of lading bound the plaintiff and dismissed its appeal.

The Privy Council recognised that the sub-bailee, by voluntarily taking the owner's goods into its custody, became the bailee of those goods with respect to the owner. The owner's rights against the sub-bailee were subject to terms of the sub-bailment if the owner had authorised the bailee to entrust the goods to the sub-bailee on those terms. The authorisation may be express or implied and the sub-bailee may also invoke the principle of ostensible authority.

In Singapore, The Pioneer Container was cited with approval in the unreported judgment of Justice Selvam in Kohap (Hong Kong) Ltd v The owners of the vessel 'Endurance I' (Admiralty in Rem Number 7 of 1996). The High Court held that where there is a case of sub-bailment, there are in fact three bailments - from A to B and from B to C, as well as a direct bailment between A and C. As such, A can sue C, the sub-bailee, for breach of duty of care as bailee. The judge, however, did not go so far as to say that A is subject to the terms of B's sub-bailment to C, as it was unnecessary to do so in this case. The only reported Singapore case that applied The Pioneer Container - T Kishen & Co v Birkart South East Asia Pte Ltd ([1997] 1 SLR 105 - similarly did not address this point.

The unreported first instance case of Yusen Air & Sea Services v KLM Royal Dutch Airlines (Suit 1614 of 1997) has provided the most guidance to date. The High Court had to decide whether the second defendant (the cargo handling agent for the first defendant) was entitled to the defence of limitation under the master air waybill entered into between the plaintiff (the cargo consignor) and the first defendant (the carrier).

The plaintiff's claim was based on negligence and breach of duty by the second defendant as bailee under common law. The master air waybill contained a Himalaya clause, which conferred on the carrier's agent the right to limit or exclude liability to the extent enjoyed by the carrier as provided in the master air waybill. Judicial Commissioner Chan Seng Onn held that the Warsaw Convention limitation of liability, expressly incorporated into the master air waybill, extended to the second defendant as the agent of the first defendant. The plaintiff could not circumvent the limitation by bringing a common law action. In coming to this conclusion, Chan cited with approval an excerpt from Midland Silicones Ltd v Scruttons Ltd ([1962] AC 446, 491) wherein Lord Denning, in his dissenting judgment, disagreed that the owner of goods could get around the exceptions and limitations of the Hague Rules by simply suing the carrier's agent.

What this means in practice for the shipper (A) is that in the event that the contract between A and the carrier (B) contains a clause that allows B to sub-contract 'on any terms' (or language similar to this), when A sues the sub-bailee (C) in tort, A may find itself bound by exclusion or limitation clauses contained in contracts further down the contractual chain which it had no knowledge of and never intended to be bound by. Therefore, A ought to inquire if transportation of its cargo requires more than one mode of transport and whether transshipment or discharging from the carrier's vessel will be required at any intermediate stops. If so, A must acquaint itself with the terms of the sub-bailment contract, to truly appreciate its legal position with respect to C when it departs with possession of its goods.

What this means in practice for C is that before C enters into any bailment arrangement with B, C ought to ensure that the contract between A and B is couched in terms that are wide enough to enable it (if and when sued by A) to rely on all exclusion and limitation clauses found in its contract with B, on the principle of sub-bailment on terms.

When A sues C in negligence or for breach of duty as bailee, the whole contractual chain, which caused the goods to eventually end up in C's hands, has to be examined. This may reveal a defence based on sub-bailment on terms found in contractual documents higher up the contractual chain that C may rely on to exclude or limit its liability.